Mortgage rates continue to decline, reaching a new historic low nearly every week. Freddie Mac reported that 30-year fixed-rate mortgages averaged 4.49 percent nationwide during the week ended Aug. 5, down 8 basis points in one month.
There is wide agreement that rates are not likely to increase much in the near term. Fannie Mae and Freddie Mac both project that mortgages will remain around 4.6 percent to 4.7 percent through the end of 2010, and Fannie Mae does not see them exceeding 5 percent even one year after that. The question is how much more rates will drop.
John Walsh, president of Total Mortgage, a multistate broker and lender, said the market is feeling some effect from the lower rates.
“People who have been on the fringes, not even thinking about moving, are jumping in,” he said. The influence is mitigated by other factors, however, that are holding down sales. People are having a more difficult time qualifying for loans under new regulations, and appraisers in some areas are struggling to find comparable properties to match value to sales prices.
“It becomes a cycle that is hard to break. We lose a sale because there are no recent comps and then we have lost that sale as a future comp,” Walsh said.
Current low rates result from “a flight to safety,” agree Walsh and Adam Quinones, managing editor of Mortgage News Daily, a Web site for the mortgage industry and consumers.
Once the stock market regained pre-crisis levels, said Quinones, investors began to focus on the negatives and — concerned mainly with protecting their principal — sought more secure investments. This typically means Treasury bonds, but now mortgage-backed securities are considered almost as safe and pay higher returns, so demand for them has skyrocketed. At the same time, new underwriting standards that have made the collateral safer also limit the availability of MBS because fewer people can qualify for the underlying mortgages.
“Demand for MBS has been setting new records week after week recently,” Quinones said, “and the more investors clamor for MBS, the farther the interest rates fall.” Because of technical factors, however, MBS prices have probably hit a floor and will not go much lower, he said.
There is also talk the Federal Reserve Bank might again enter the mortgage market. The story goes that the Fed, which purchased $1.25 trillion of MBS in the 15 months that ended in March, might resume those purchases, creating even more demand and driving rates still lower.
While Quinones agreed this could cause rates to fall below the current floor, he does not see it happening because there is already such a strong market for MBS.
A further drop in rates probably would do little to increase home sales but could spur a flood of refinancing, principally among people who already have refinanced once under the new rules.
“This would serve to do little more than devalue the portfolio that the Fed, FHA, Fannie and Freddie already own,” Quinones said.
His one caveat: If the economy begins to look as though it might double dip, then the Fed will be looking for ways to stimulate the economy. Lower interest rates that generate another round of refinancing and lower mortgage payments would be one way to put more money in homeowners’ pockets to spend elsewhere in the marketplace.
